Carlos Tovar
Federal Taxation
March 6, 2011

Article Brief: “Innocent Spouse Relief: Alternatives After the Lantz Case”

Article Brief: “Innocent Spouse Relief: Alternatives After the Lantz Case” The dilemmas described in the Lantz case reflect the high level of ambiguity that a filing spouse experiences when challenging IRC 6015 provisions for an Innocent Spouse Claim. Specifically, the stipulated filing timeframe in sub-section (F) of IRC 6015 – Equitable Relief. In general, there’s major discrepancies between the tax courts’ and IRS’ interpretation as to when the Equitable Relief application should be filed by the innocent spouse according to what’s referenced in sub-section F of the code. Such case brings about uncertainty when tax planners advice their clients on how to better strategize when in this situation, and better yet, avoiding it all together. Although the basic background and scope of code IRC 6015 and its sub-sections are fundamentally important, there are other components that bring about the controversy surrounding the provision. The most relevant is perhaps the fact that although sections 6015(B) and (C) requires requesting relief by filing form 8857 within two years of the initiation of an IRS collection activity with respect to the innocent spouse, section (F) contains no mention of a time limit for filing. Nevertheless, the IRS applies the same two-year limit to the equitable relief under section 6015 (F). Taking these points of controversy in consideration, one can further explore

the effect of the Lantz case, where the innocent spouse failed to file for section (F) within two years of the IRS notice of intention to levy. Consequently, the IRS denied Lantz’s claim for equitable relief based on the expired filing deadline, and Lantz’s argued that the time limit regulation on section (F) was invalid. In the first instance, the Tax Court ruled in favor of Lantz because it reasoned that section (F) did not implicitly include a time deadline as it did in section (B) and (C), and the regulation imposed by the IRS was not permissible because the intent of Congress was that section (F) would serve as a last resort. The Tax Court also reasoned that limiting section (F) to a filing deadline would counteract the Congress’ purpose of providing a broader relief for those that were not eligible for section (B) and (C) of IRC 6015. Short after, an appeal by the IRS resulted in a reverse of the Tax Court’s ruling by the Seventh Circuit. The grounds for the Seventh Circuit’s ruling were that without a time constraint, claims would be filed indefinitely. In order to support its reasoning, the court provided samples of other instances where Congress did not include time deadlines and courts borrowed limitations statutes from other areas of the law. Also, the court asserted that a broader relief was actually provided by section (F) as it applied to unpaid tax, as opposed to sections (B) and (C), which only apply to understatements of tax. Lastly, it was pointed out that the wording of the statute states that, “relief may be granted “, and that authority to prescribe regulations was specifically delegated to the Treasury Department. As a result of the Seventh Circuit ruling against Lantz, others seeking equitable relief under section (F) will have to file within the two-year deadline. Similarly, the Second, Third, and Sixth Circuit courts are handling cases of the same nature and verdicts are pending. Given the number of complications that surround the filing time limitations of section (F), IRS attorneys are now instructed to litigate such cases. Considering the implied costs and risk associated to litigation, taxpayers seeking equitable relief should preferably aim for preventive and alternative avenues of relief. Perhaps the number one prevention to take is avoiding the two-year time limit. Other recommended prevention is filing separate returns instead of a joint return if a tax problem is suspected. In case any of these options are not useful, then an alternative is applying for a 9100 Relief - extension of time to file. The downside of this alternative is that the documents to support the 9100 Relief could be extensive. In the Lantz case, either party did not consider such alternative as they both agreed that efforts to obtain a 9100 Relief would not be positive. Nevertheless, it is unknown why Lantz would not seek relief through provision 9100 as this may be a promising opportunity to obtain relief under the described circumstances. Another alternative is to seek release of levy, where the IRS releases levy and returns property to the taxpayer when the levy creates an economic hardship that would prevent the taxpayer from meeting its basic living expenses. This alternative is ultimately favorable in extreme circumstances, and also there’s no time limit for obtaining the relief. Overall, it’s recommended that Circuit appeal decisions are followed closely as those rulings will notably have an impact on future cases with similar circumstances to that of Lantz. Otherwise, only a Supreme Court hearing or an amendment to IRC 6015 will clarify the issues at hand. Until then, it’s best to plan ahead to work around or avoid the repercussions of inconsistencies surrounding Equitable Relief under IRC 6015 sub-section (F).